How to Enforce an Earn-Out Agreement When the Buyer Damages the Business After Completion
If you sold a business and part of the price depends on an earn-out, it can be deeply frustrating to discover that the buyer now controls the business in a way that appears to reduce what you should be paid. If the buyer has diverted revenue, changed the way the business is run, loaded costs into the target business, or otherwise manipulated performance after completion, you may have legal recourse under the sale agreement and under general principles of English contract law.
What Is an Earn-Out and Why Do Disputes Arise?
An earn-out is a contractual mechanism used in share purchase agreements (SPAs) or asset purchase agreements (APAs), where part of the purchase price is contingent on the future performance of the business. Typically, this performance is measured by reference to financial metrics such as revenue, EBITDA (earnings before interest, tax, depreciation and amortisation), or profit over a defined period, often one to three years. Earn-outs are often used to bridge a valuation gap between buyer and seller. A seller may believe the business will continue to perform strongly, while a buyer may be more cautious. By deferring part of the price, both parties share the risk.
Disputes arise because, after completion, the buyer usually controls the business. This creates an inherent tension. The seller’s entitlement depends on performance, but the buyer has the power to influence that performance.
What Does ‘Damaging the Business’ Mean in an Earn-Out Dispute Context?
From a legal perspective, the issue is rarely framed as ‘damage’ in general terms. Instead, the focus is on whether the buyer has breached specific contractual obligations or acted in a way that undermines the agreed earn-out framework.
Common examples include:
- Diverting revenue or opportunities: A buyer may redirect business to another group company or restructure operations so that income is recognised elsewhere. While this may be commercially rational for the buyer, it can artificially depress the earn-out calculation and lead to an earn out dispute.
- Changing accounting policies or cost allocation: Earn-outs often depend heavily on how accounts are prepared. A buyer might introduce new accounting treatments, allocate additional overheads, or accelerate costs, which reduces reported profit even if the underlying business remains healthy.
- Failing to support the business adequately: In some cases, the buyer may reduce marketing spend, remove key staff, or deprioritise the acquired business. This can lead to reduced performance and, consequently, a lower earn-out.
- Integrating the business in a way that obscures performance: Post-acquisition integration into a wider group can make it difficult to isolate the performance of the target business. This can create both practical and legal challenges in calculating the earn-out.
Whether these actions amount to a legal breach depends entirely on the wording of the agreement.
Key Legal Principles Under English Law
English law generally respects freedom of contract. This means that your rights will depend primarily on what the earn-out provisions actually say, rather than any general notion of fairness.
However, several legal principles are particularly relevant:
- Express contractual obligations: Many well-drafted SPAs include provisions requiring the buyer to operate the business in good faith, in the ordinary course, or with a view to maximising the earn-out. If such clauses exist, they can form the basis of a claim.
- Implied duties and good faith arguments: English law is traditionally cautious about implying duties of good faith. However, in certain relational contracts, or where the structure of the agreement suggests an expectation of honesty and cooperation, arguments may be available. These are fact‑sensitive, not guaranteed, and usually operate as supporting arguments alongside the express wording rather than replacing it.
- Braganza-type discretion principles: Where a contract gives one party discretion affecting the other’s financial outcome, that discretion must not be exercised irrationally or in bad faith. This can be relevant where the buyer controls accounting judgments or operational decisions affecting the earn-out.
- Prevention principle: A party cannot rely on the non-fulfilment of a condition if it has caused that failure. In the earn-out context, this may apply if the buyer’s conduct prevents the business from achieving the agreed targets.
How to Enforce an Earn-Out Agreement
- Review the SPA in detail
The starting point is always the contract. Key provisions include the earn-out calculation mechanism, accounting policies, conduct of business clauses, and dispute resolution procedures. Small drafting nuances, for example in definitions or schedules, often determine the outcome and will shape the arguments open to you. - Gather financial and operational evidence
You will need to demonstrate how the buyer’s actions affected performance, not just that performance has fallen. This may involve reviewing management accounts, board minutes, internal communications, and any changes in accounting treatment or business strategy, so that you can build a clear picture of what has changed and when. - Engage with the contractual dispute process
Many earn-out clauses include expert determination provisions, particularly for accounting disputes, and may set out specific stages or time limits. These processes are usually binding and can be faster than litigation, but they are typically limited to accounting or calculation issues and may not address broader conduct or good faith concerns, so it is important to understand exactly what kind of dispute the clause is designed to resolve. - Consider formal legal action if needed
If negotiation and contractual processes fail, claims may include breach of contract, damages, or declarations as to how the earn-out should be calculated. In some cases, sellers seek to reconstruct the accounts on a ‘but for’ basis, reflecting what performance would have been without the buyer’s conduct, which will usually require careful financial evidence and expert input.
The strategy adopted at the outset, including which steps to take in what order, can significantly affect leverage and outcome. If you are facing an earn-out dispute or are concerned about buyer conduct post‑completion, taking advice early can help preserve evidence and strengthen your negotiating position before relations deteriorate or deadlines pass.
Practical Steps to Protect Your Position
Even before a dispute escalates, there are practical steps you can take to protect your entitlement.
- Maintain access to information where possible: Some agreements allow the seller ongoing, lawful access to financial information or management reports. Exercising these rights proactively can help identify issues early and avoid surprises at the end of the earn-out period.
- Document concerns as they arise: If you observe conduct that may affect the earn-out, raise it in writing. This creates a contemporaneous record and may discourage further problematic behaviour.
- Avoid informal concessions: Sellers sometimes agree to changes in operations or accounting without fully understanding the impact on the earn-out. Any variation should be documented and, ideally, legally reviewed.
- Seek early legal and accounting input: Earn-out disputes are often as much about accounting as law. Coordinated advice can help you assess whether there is a viable claim and how best to quantify it.
Risks, Time Limits and Commercial Considerations
Pursuing an earn-out claim involves both legal and commercial risks, which should be carefully evaluated.
- Limitation periods: Contract claims are generally subject to a six‑year limitation period under the Limitation Act 1980 for simple contracts, although the SPA may include shorter contractual limitation periods.
- Evidential challenges: Demonstrating causation, that the buyer’s actions caused the reduction in earn-out, can be difficult. Courts and experts will scrutinise assumptions and counterfactual scenarios closely.
- Relationship dynamics: In some cases, the seller remains involved in the business post-completion. A dispute can strain or damage that relationship, which may have wider commercial implications.
- Costs and proportionality: Disputes can be complex and evidence-heavy. Legal and expert costs can be significant, particularly if the matter proceeds to litigation. It is important to assess whether the likely recovery justifies the cost and risk.
A clear, strategic approach is essential to balancing these factors.
Earn-out and post‑completion dispute FAQs
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What is an earn-out and why is it used?
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An earn-out is a way of structuring part of the purchase price so that it is paid later and depends on the future performance of the business. It is often used where buyer and seller have different views on value, or where future growth is uncertain, so the seller shares in upside if the business does well and the buyer is protected if it does not.
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What happens if the buyer changes how the business is run after completion?
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A buyer is usually entitled to run the business, but its freedom may be limited by the wording of the sale agreement. If the buyer makes changes that undermine the earn-out, for example diverting revenue, loading costs or withdrawing support, there may be a breach of contract or other legal issues. The key question is whether the buyer’s conduct is within what the agreement allows, or whether it has gone beyond what was agreed.
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Can I challenge the buyer’s earn-out calculation if I think it is unfair?
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In many cases, yes. Many earn-out clauses set out a process for disputing calculations, such as allowing you to raise objections within a set period or refer accounting disputes to an independent expert. In other cases, a wider contractual dispute may be needed. Whether a challenge is realistic depends on the wording of the SPA, the evidence available and the sums at stake.
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Is it worth taking advice if the earn-out has already been missed?
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Usually, yes. Even if the earn-out period has ended or the buyer says the targets were not met, it may still be possible to review the calculations and the way the business was run during that period. Advice can help you understand whether the outcome was simply poor performance, or whether there is a basis to argue that the buyer’s conduct or accounting decisions unlawfully reduced the earn-out.
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How quickly should I act if I suspect the buyer is frustrating the earn-out?
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Speed matters. Delay can make it harder to obtain documents, reconstruct events or comply with any contractual notice requirements in the SPA. If you think the buyer is undermining performance, it is sensible to take advice promptly, gather the key documents and understand your options before evidence is lost or deadlines pass.
How JLN Can Help
Earn-out disputes sit at the intersection of corporate law, contract interpretation, and financial analysis. They require a careful and commercially informed approach.
At JLN, we regularly advise business owners, shareholders, and investors on post-completion disputes, including earn-out enforcement. We can assist with reviewing your SPA, assessing the strength of your claim, engaging with the buyer, and, where necessary, pursuing formal proceedings.
Contact Us
We will respond to most enquiries with both an indicative scope of work and fee estimate, as well as the offer of a complimentary 20-minute discovery video call to discuss your issues and how we can help, before sending a more considered formal fee estimate via email.
In some limited cases, if you would just like initial advice and guidance on a call, we may instead offer a fixed fee appointment (commonly charged between £280 and £500 + VAT) whereby we will review the information you provide, hold a video call consultation and then follow up with an advisory email (as well as a fee estimate for any further work identified).
Please email wewillhelp@jonathanlea.net or call us on 01444 708640 as a first step. We first need an overview of the background and your issues, together with any significant documents, to provide an indicative scope of work and fee estimate.
Related Articles
- What Are Earn-Outs And How Can They Work?
- Earn-Out Disputes After Selling a Business: Your Legal Rights
- Earn-Out Disputes UK: Porton v 3M High Court Strategy
- Can I Challenge an EBITDA Earn-Out Calculation After Selling My Business?
- Earn-Out Dispute UK: 5 Early Warning Signs of Buyer Manipulation
- Structuring Earn-Outs and Deferred Payments in Smaller Mergers and Acquisitions
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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.